Bonds are shaken, Re stirred

Government bond prices crashed across the spectrum on Monday with the yield on the 10-year benchmark 7.37 per cent 2014 paper inching up to 5.60 per cent, up 12 basis point from Friday's close of 5.48 per cent.

In the forex market, the rupee lost 25 paise to close at 45.9450 against the dollar. On Friday, it closed at 45.68/69.

Bond prices crashed by more than a rupee in the long- and medium-term of the maturity spectrum, while in the short end, prices dipped by 60-70 paise.

Government bond yields climbed to their highest close since late August last year as the sentiment turned bearish after Reserve Bank of India Governor YV Reddy's comments.

Reddy said the authorities would have to revisit their monetary policy stance if global interest rates tightened faster than expected.

Reddy's comments come in the wake of the domestic inflation rate at 5.50 per cent and the US Fed expected to raise rates as early as in August.

"In November, there was an expectation that global interest rates could go up and that liquidity might dry up. Taking into account the November and May (credit policy) statements together, we were correct in continuing to emphasise the domestic factors. However, if the global trends exceed what we assumed, there would be a case for revisiting them. Between May 18 and now, there is certainly evidence of interest rates hardening in the developed world. Financial markets are already factoring in this," Reddy said.

The spot rupee opened at 45.65/67 to a dollar but lost almost 29 paise to a day's low of 45.96, before recovering to 45.93/94 at close, said dealers.

Dollar demand for oil payments and active buying of banks for investing in the non-deliverable forward market resulted in a sharp depreciation. The dollar has been weakening to all major currencies in the last few days.